Trouble in the pipeline

If you think that $130 for a barrel of oil is bad, it could get much worse.

According to The Economist, the Russian oil industry is in trouble. For the past few years the demand for more oil from the growing economies of India and China have been met by increased production from Russia, keeping things roughly in balance. But the output from Russia's oil fields have started to drop, meaning that they likely have passed their peak level of production.

Revenues from oil and gas sales have let Russia go from an economic collapse in 1998 to become one of the world’s largest economies just ten years later. They have also helped to stabilize the world's oil supply. But the growth of Russia's oil industry was something of an illusion.

Much of the oil industry in Russia fell apart during the end of the Soviet Union in the 1980’s. In the 1990's, Russia was able to have their oil production steadily grow simply by repairing the oil drilling and pumping equipment they already had and by drilling more wells in fields that were already known and established. But now those fields are pumping out as much oil as they possibly can.

There's more oil to find in Russia, a lot more, some experts think as much as 100 billion barrels worth. But much of it is locked away in remote locations in the Russian Far East, meaning it will take a lot of effort (and money) to get it out of the ground and into the world oil market. The Russian government also has compelled foreign companies into partnership agreements with Russian firms to work the fields - in some cases renegotiating deals that were made during the 1990’s, which the Russian government felt were not fair to Russia. The result is that exploration in these new fields has been delayed. High taxes levied by the government on new oilfields also have not helped bring them online.

So it seems the world cannot count on increased oil production from Russia to offset higher and higher demand - so expect to see the prices for a barrel of the black stuff to creep even higher. The oil situation could also be a problem for President Medvedev, since oil and gas are currently the two pillars of the Russian economy. He already is dealing with complaints about higher domestic fuel prices and inflation. Less oil coming out of the ground is the last thing he needs.